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December Housing Starts report offers optimism for 2021

by Kerrie Kennedy

U.S. home builders rushed to meet buyer demand during the last month of 2020, as housing starts rose 5.8% month over month and single-family home construction climbed nearly 28% from December 2019.

According to the latest report from the U.S. Census Bureau, permits for new homes — which signals how much construction is in the pipeline — also rose in December, up 4.5% to an annual rate of 1.71 million.

“Home construction finished the year with the biggest bang since 2006 with 1.669 million units started for construction in December (annualized),” said National Association of Realtors Chief Economist Lawrence Yun in a statement. “That means the worst of the housing shortage could soon come to an end. More inventory is clearly needed to lessen the heat of multiple offers and the consequent frustration of multiple losing bids.”

Despite the positive December report, challenges remain for home builders, including rising material costs led by a surge in lumber prices. According to data from the Labor Department, softwood lumber prices rose 52.2% year over year in December.

“While builders continue to push to meet demand, supply-side headwinds will remain in 2021,” said First American Deputy Chief Economist Odeta Kushi in a statement. “In the January survey, builder confidence in the market for single-family homes fell. Builders are facing multiple supply-side headwinds, including increasing lumber and material costs and a dearth of affordable lots, which could slow home-building momentum.” 

According to the National Association of Home Builders, the availability of skilled labor — further hampered by the COVID-19 pandemic — is expected to put push already high home prices even higher.

“The issues that have limited housing supply in recent years, including land and material availability and a persistent skilled labor shortage, will continue to place upward pressure on construction costs,” said NAHB Chief Economist Robert Dietz in a recent blogpost. “As the economy improves with the deployment of a COVID-19 vaccine, interest rates will increase in 2021, further challenging housing affordability in the face of strong demand for single-family homes.”

While the housing sector is expected to continue to lead the economy in recovery in 2021, it’s going to take some time, predicted NAR.

“For 13 straight years prior, homebuilders have been underproducing below historic norms. Therefore, it will take robust home construction this year and next, at a minimum, to fully supply the market to properly meet the demand,” added Yun.

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